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Chapter
1
The Scope and Method
of Economics
Prepared by:
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Chapter Outline
Why Study Economics?
To Learn a Way of Thinking
To Understand Society
To Understand Global Affairs
To Be an Informed Voter
The Scope of Economics
Microeconomics and
Macroeconomics
The Diverse Fields of Economics
The Method of Economics
Theories and Models
Economic Policy
An Invitation
Appendix: How to Read
and Understand Graphs
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Economics is the study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided. The key word in this
definition is choose. Economics is a behavioral, or social, science. In large measure it is
the study of how people make choices. The choices that people make, when added up,
translate into societal choices.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
The study of economics teaches us a way of thinking and helps us make decisions.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
A knowledge of economics is
essential to be an informed voter.
When we participate in the political process, we are voting on issues that require a
basic understanding of economics.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Macroeconomics
PRODUCTION
PRICES
INCOME
EMPLOYMENT
Production/output in
individual industries
and businesses
Price of individual
goods and services
Distribution of
income and
wealth
Employment by
individual
businesses
and industries
National
production/output
National income
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Using the device of ceteris paribus is one part of the process of abstraction. In formulating
economic theory, the concept helps us simplify reality to focus on the relationships
that interest us.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
AN INVITATION
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
marginalism
descriptive economics
microeconomics
economic growth
model
economic theory
normative economics
economics
Ockhams razor
efficiency
opportunity cost
efficient market
positive economics
empirical economics
equity
scarce
fallacy of composition
stability
Industrial Revolution
sunk costs
macroeconomics
variable
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
HOW TO READ AND UNDERSTAND GRAPHS
A graph is a twodimensional
representation of a
set of numbers, or
data.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
TIME SERIES GRAPH
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
GRAPHING TWO VARIABLES ON A CARTESIAN
COORDINATE SYSTEM
The Cartesian coordinate
system is the most
common method of
graphing two variables. This
system is constructed by
simply drawing two
perpendicular lines: a
horizontal line, or X-axis,
and a vertical line, or Yaxis. The axes contain
measurement scales that
intersect at 0 (zero). This
point is called the origin.
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
PLOTTING INCOME AND CONSUMPTION DATA
FOR HOUSEHOLDS
TABLE 1A.1 Total Disposable Personal Income in the United
States, 19752005 (in billions of dollars)
YEAR
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
TOTAL DISPOSABLE
PERSONAL INCOME
1,181.4
1,299.9
1,436.0
1,614.8
1,808.2
2,019.8
2,247.9
2,406.8
2,586.0
2,887.6
3,086.5
3,262.5
3,459.5
3,752.4
YEAR
TOTAL DISPOSABLE
PERSONAL INCOME
1989
4,016.3
1990
4,293.6
1991
4,474.8
1992
4,754.6
1993
4,935.3
1994
5,165.4
1995
5,422.6
1996
5,677.7
1997
5,968.2
1998
6,355.6
1999
6,627.4
2000
7,120.2
2001
7,393.2
2002
7,827.7
2003
2007 Prentice Hall Business Publishing Principles
of Economics 8e by8,159.9
Case and Fair
Appendix
TABLE 1A.2 Consumption Expenditures
and Income, 2003
Bottom fifth
2nd fifth
3rd fifth
4th fifth
Top fifth
AVERAGE
INCOME
BEFORE TAXES
$
8,201
21,478
37,542
61,132
127,146
AVERAGE
CONSUMPTION
EXPENDITURES
$ 18,492
26,729
36,213
50,468
81,731
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
An upward-sloping
line describes a
positive relationship
between X and Y.
A downward-sloping
line describes a
negative relationship
between X and Y.
FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope
2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Appendix
Appendix